Intel's (NASDAQ: INTC ) recent earnings report was somewhat of a mixed bag. There were positives, like the apparent stabilization of the PC market, and there were negatives, like slower-than-expected growth in the data-center division. Cautious guidance, along with the announcement of layoffs the following day, appeared to spook investors as shares of Intel declined, with various analyst downgrades fueling the fire. Here's the good and the bad from Intel's earnings report.
The good: PC stabilization
With a bulk of Intel's revenue and profit coming from PC chip sales, the decline of the PC industry has been a good reason to worry about the long-term health of Intel. But there are signs that the decline is slowing, and research firm Gartner thinks that PC sales in the United States have finally bottomed.
Intel reported flat sales for its PC group in the fourth quarter compared to the same quarter last year, with full-year sales declining by 4%. PC operating income rose significantly in the fourth quarter, although it still declined for the full year, as the companywide gross margin rose by four percentage points, year over year.
Notebook chip volume decreased by 4%, while desktop chip volume fell by 2% -- both smaller decreases than the PC market as whole. This suggests that Intel gained market share in the fourth quarter.
The recent earnings release from AMD (NASDAQ: AMD ) seems to bear this out. AMD's computing solutions division, which includes both PC chips and server chips, shrunk by nearly 13%, year over year. Revenue from the PlayStation 4 and Xbox One helped boost revenue overall, but AMD's core business isn't faring well. The company is increasingly focusing on semi-custom deals like the game consoles in order to drive growth, but its PC share losses to Intel should be troubling to AMD investors.
While the selling prices of notebook chips decreased by 4% in 2013, desktop chip prices increased by 6%. The desktop market was particularly strong for Intel, with mature enterprise markets driving this growth. The upcoming end-of-support date for Windows XP was cited as one reason for the strong desktop chip performance -- something my Intel earnings preview said looked likely -- so the desktop market may settle down after the transition is complete. Intel has guided for a mid-single-digit decline in its PC business in 2014, so the company is likely assuming that desktop sales will weaken.
Some of the decline in the PC business will be balanced by the rising mobile business, with Intel targeting massive growth in its Atom chips in 2014. In the company's conference call, CEO Brian Krzanich stated that nearly 70 2-in-1 designs -- which combine a tablet and laptop -- will be available going into the back-to-school season this year. This will certainly hurt sales of low-end laptops, but growth in the 2-in-1 category might make up for it.
The bad: weak server sales
At Intel's investor meeting last November, the company projected that its server revenue would grow by around 15% annually over the long term. Intel enjoys a dominant market share in servers, and with server software overwhelmingly built for the x86 architecture, the release of ARM-based server chips from AMD and others should have a minimal effect on Intel. The company has guided for low double-digit growth in the server business in 2014, requiring significant improvement over the 7% increase in 2013.
While the traditional server market is declining, demand for server chips is being driven by the massive data centers being built by companies like Google, Microsoft, and Amazon. There was recently a rumor that Google was considering designing its own ARM-based server chips in order to drop Intel as a supplier, but the evidence was thin at best. The real problem for Intel is that these companies are likely getting better deals, since they buy in such huge quantities. Over time, this may cause server chip margins to decline.
Unit volumes in the data-center group rose just 3% in 2013, with a 4% increase in the average selling price boosting growth. This makes the double-digit growth goal for 2014 seem optimistic, and I wouldn't be surprised if Intel fails to hit that target.
The bottom line
Intel's results were mediocre at best, with stronger-than-expected PC chip sales balancing weaker-than-expected server chip sales. The strength in the PC business is partially temporary, caused by the enterprise transition from Windows XP, and most of 2014 won't benefit from this. While Intel remains a highly profitable company, a return to consistent earnings growth seems at least a few years away.
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